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On The Gaslighting About Inflation

Reportedly, we’re going to need to have a recession next year in order to curb our wild spending habits and bring inflation under control. According to some economists, we’ve all been spending our hefty wage rises so freely that up to 50,000 of us may have to lose our jobs next year to get the economy back in proper working order. Who knew?

Reserve Bank governor Adrian Orr is doing all he can - raise interest rates - even though that has absolutely no impact (a) on how the Ukraine war has pushed up oil and grain prices, or (b) on clearing the ongoing supply chain blockages caused by China’s Zero Covid policy. As a result of this impotence, ordinary New Zealanders are being forced to over-compensate for the RB’s inability to do anything much at all about the impacts of imported inflation. (i.e. Vladimir Putin doesn’t lie in bed at night worrying about New Zealanders paying a higher interest rate on their mortgages.)

Interestingly… During the struggle against inflation over the past 18 months, there has been no debate at all in New Zealand over the extent to which excessive profits may be fuelling inflation. All the overt worrying has been about the inflationary impact of wage rises. The powers that be don’t seem to be concerned about the price-driven profits that the banks, supermarket chains, oil companies etc continue to extract, even after the government’s pandemic subsidies have been phased out.

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Nope, it's all our fault. We’ve had it too good for too long. Thanks to Covid and Adrian Orr, we’ve all enjoyed shamefully easy access to cash, and have been spending like there’s no tomorrow. No wonder many of us find it so hard to get a handle on this economics lingo. Because what’s good for the economy seems to be almost the exact opposite for what’s good for most of the people in it.

For example: In confusing ways, we’re regularly told it’s a good thing when the currency weakens, even if that means we have to pay more to fill up the petrol tank. Except… in the last few days, some economists have been saying it's actually good news that the currency is getting stronger, because imports will cost less and this will cool down inflation. So what’s really the best currency rate for getting us on the good foot? A stronger currency or a weaker one? Who knows. Get on up, get on down, as James Brown used to say.

Free trade is another puzzle. Cheese and lamb may come from farms just down the road, but – somehow - it's supposed to be quite OK for us to have to have to pay the same price (or more) as foreigners do, even after the stuff has been shipped to them halfway around the world. How can paying the going price 12,000 kilometres away for goods made right next door be in the best interests or ordinary New Zealanders? Newsflash: It isn’t.

But wait, there’s one last thing. Apparently, interest rates need to rise because… Well, the logic goes something like this. If we are forced to pay more to the banks to (a) compensate them for the rise in the Official Cash Rate and (b) let them rake in the increased profit margin they’ve been demanding this year… Then that is allegedly good for us. Because it means we will have less money left over to spend on food at the supermarket, or on eating out. Supermarket prices will stay the same and the banks do even better but we’ll have less spare money to spend on essentials and non-essentials alike. As our discretionary spending dries up, local retailers, cafes, restaurants and small tourism operators will be screwed. Weirdly, all of this is being sold to us as a Very Good and Inevitable Outcome.

These sorts of outcomes can lead some people to conclude that capitalism doesn’t work for the general good any more, not in the way it briefly did post WWII, up until say, the early 1970s. Yet before junking it altogether I’d like to see us give redistribution a whirl. Using Scandinavian levels of taxation to deliver Scandinavian levels of public services might be an economic model worth a shot. Weren’t we once the world’s social laboratory for progressive ideas ?

Luxon, Tamed.

Mind you, some of our leading politicians don’t seem to know much about how the economy works either, and they couldn’t care less. This group would seem to include National party leader Christopher Luxon, judging by Sunday’s crushing encounter between Luxon and Jack Tame on RVNZ’s Q&A show. As others have pointed out, Luxon said “ I don’t know, Jack” on a depressingly regular basis when asked (a) what level of unemployment would be required to bring down inflation (b) what the carbon price should be (c) whether most bootcamp detainees would be Māori (d) what National’s own Three Waters policy might be and (f) whether he had confidence in Adrian Orr as Reserve Bank governor.

Tame is not the only one wondering how National still gets away with claiming to be the more competent party at running the economy. Tame cited strong evidence to the contrary, starting with a damning time-lime that’s worth quoting in full:

Tame : “July 2021: almost eighteen months ago, the Reserve Bank stopped large scale asset purchases, which is the first real sign it was concerned about inflation.

October 2021: the Reserve Bank becomes the first central bank in the developed world to start lifting interest rates - another sign it was concerned about inflation. Two weeks later, the National Parry announced a multi-billion dollar stimulus package.

November 2021: The Reserve Bank lifts the Official Cash rate for the second time, and signals that more rises are likely.

February 2022: The Reserve Bank lifts the OCR for the third time in a row, just another sign that it is concerned about soaring inflation.

And it is at that point with inflation at 6%, forecast to get close to 7% that you announce multi-billion dollar tax cuts, the majority of which would go to the biggest earning New Zealanders, putting fuel on the inflation fire.

When I lay that out, how can you tell me you’re the party of economic management?”

And Luxon’s response?

Luxon: “Absolutely, Jack. [Changing the subject] Look, we’re going to inherit an economic mess from Labour, there’s no doubt about it…”

We’re going to see and hear a lot more of this in the coming months. The Tame interview is a classic illustration of the way politicians have been coached to perform when challenged by the media. First, drop a dead bat on the question: Remember, if you don’t disclose any information that’s still a win for you. Better yet, ignore the question completely and stick to your attack lines of government criticism. Whatever you do, don’t be trapped into saying anything that ties you and your party to any concrete policy commitments.

We’ve seen a lot of this from Luxon in 2022, and it will continue all the way up to polling day, if he can get away with it.

Footnote: BTW, you have to ask: What sort of central banking nerd tries to combat inflation by hiking up interest rates massively at this time of year, apparently in order to scare consumers into spending less at Christmas time? Memo for Adrian Orr: Christmas sales keep retailers afloat. And regardless, people will still spend at Christmas and go into debt to do so, because (a) it's Christmas and (b) because of the kids. But who ever thought bankers have any idea about how real people live their lives?

Footnote Two: Terrific article here by Victoria University academic and tax professor Lisa Marriott, on the arguments for imposing windfall taxes on excessive profits, plus a brief history of such taxes. Her restrained conclusion:

In the end, windfall taxes can be beneficial. But they are contentious due to the different priorities of shareholders, companies and consumers. If we’re concerned about inequality and further transfers of wealth away from those who have the least, however, windfall taxes are – at a minimum – worthy of greater consideration.

Footnote Three: Allegedly, our government spending is out of control. It isn’t. Sure, government spending has risen from a freakishly low 27% of GDP pre-Covid, to 31% now. But that’s tipped to fall, given that much of the rise was linked to financing the wage subsidies and other supports that kept the economy ticking over during the initial onslaught of Covid. In addition, there were huge social deficits in public health, housing, education, poverty, defence and security, and national infrastructure- all of which had been left festering by the previous National administration.

Even so… Finance Minister Grant Robertson has hardly run wild with public spending. Far from plunging the country into debt, our 31% ratio of public debt to GDP leaves us in far better shape than Australia (36.1%) Germany (59.8), Canada (71.8%) and France (98.1%). Over in the USA, the home of capitalism, the Americans are looking down the barrel of public debt rising this year to 124.9% of GDP. Meaning: New Zealand could easily have borrowed more and spent it on meeting social needs without scaring the credit agency horses. But appeasing the gods of inflation has demanded otherwise.

James Brown’s policy advocacy

Frankly, if you want to get the economy – or your body – on the good foot, this will do it every time:

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